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Moody's Talks - Inside Economics
Digital Currency and Delta
Aaron Klein, Senior Fellow in economic studies at Brookings Institute, joins Mark, Cris, and Ryan to discuss the current state and future of crypto currencies.
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Mark Zandi:
Welcome to Inside Economics. I'm Mark Zandi, Chief Economist of Moody's Analytics, and I see a familiar face, Cris deRitis. Where you been, Cris?
Cris deRitis:
I've been out and about-
Mark Zandi:
Yeah?
Cris deRitis:
... visiting family in Italy. I made the big jump over the ocean.
Mark Zandi:
Yeah, and you're speaking to us from a little village [crosstalk 00:00:35]-
Cris deRitis:
A tiny village, the home village of my father. It's in Abruzzo, which is on the opposite coast from Rome, so on the Adriatic Sea.
Mark Zandi:
Uh-huh (affirmative).
Cris deRitis:
A really tiny village. They say there are 1,900 people here, but I don't believe it. I think they're counting people like me, immigrants, so a really small agricultural village, and, surprisingly, the internet works this time. It's-
Mark Zandi:
Yeah. You sound better than Ryan.
Cris deRitis:
... making progress.
Mark Zandi:
Yeah. You said it's Abruzzo? Is that the name of the village?
Cris deRitis:
Abruzzo, yes. Yes, that's the region.
Mark Zandi:
Oh, I see. How is Italy navigating the pandemic? Any better than we're doing here in the US?
Cris deRitis:
Actually, much better.
Mark Zandi:
Much better.
Cris deRitis:
I left at the end of August, and I was really concerned. I have a young son, as some of the podcast listeners will know, but actually the numbers are much better here in terms of the number of cases, vaccination level rates are higher, and people are just, I see, very aware.
Cris deRitis:
Masking is routine, I think because it's such a tourism-driven economy. Everyone knows that they need to help out or do their part to ensure that tourists feel safe and comfortable.
Mark Zandi:
Mm-hmm (affirmative). Well, it's good to have you back. You were gone for two weeks, and it was just me and Ryan, and I tell you, that's tough.
Mark Zandi:
I got to keep things going here without you, so it's good to have you back. Hey, and a good time to come back because we're going to talk about crypto.
Ryan Sweet:
That's the only reason he came back.
Mark Zandi:
Oh, is that right?
Ryan Sweet:
Yeah, and-
Cris deRitis:
I got to learn.
Mark Zandi:
He's the crypto king, remember, beginning of the podcast, the whole crypto king thing, although, he's a little less wealthy today than I think he was a few weeks ago, but we'll come back to that-
Cris deRitis:
Is that right? Okay.
Mark Zandi:
... and we've got a great guest, who I'm going to introduce in just a minute to help us navigate the crypto issues, which are numerous.
Mark Zandi:
Then, you heard the voice of Ryan Sweet. Ryan... Oh, and I should say, of course, Cris is the Deputy Chief Economist, so good to have you.
Mark Zandi:
Then, of course, Ryan is the Director of Real Time Economics, and Ryan also manages our Economic View website. Ryan, any good research this week on the Economic View website? This is a test, by the way.
Ryan Sweet:
No, actually, there was... Laura Ratz, our colleague, did a great piece on natural disasters, kind of summarizing the economic cost of Hurricane Ida, but also weaving in the wildfires that are ongoing on the west, so I thought that piece really stood out this week.
Mark Zandi:
That is not the piece of research I had in mind, Ryan.
Ryan Sweet:
No. You're trying to beat me into the piece that you did on foreclosures, and no! I'm going to pick something else.
Mark Zandi:
Yeah, exactly, rental eviction moratorium and the emergency rental assistance, and I thought-
Ryan Sweet:
You're telling Cris that you had to put me on your back for the last two weeks, and then you expect me to say, "Oh, here's Mark Zandi's greatest piece."
Mark Zandi:
... Oh, good point. That's a great point, actually. You make a good point there, yeah, but I recommend that piece. If you're interested in the rental eviction issue, I thought that was a pretty good piece. Yes, I did coauthor it with Jim Parrott over at Urban Institute, but, we also have a guest this week, Aaron Klein.
Mark Zandi:
Aaron is a Senior Fellow in Economic Studies at Brookings. Welcome, Aaron. Good to have you.
Aaron Klein:
Mark, pleasure to be here.
Mark Zandi:
You're all things financial system at Brookings with, I know, more of a focus on financial technology and the payment system and, obviously, a great guy to have on to talk about digital currency, so, thank you for coming.
Mark Zandi:
Hey, I was reading your bio. I didn't realize you were kind of like the Chief Economist for Treasury early on in the Obama administration, right?
Aaron Klein:
I served as Deputy Assistant Secretary for Economic Policy for the first term of the Obama administration, joining it right in the teeth of it in 2009, doing TARP implementation after having been the Chief Economist on the Senate Banking Committee when we wrote and enacted TARP in 2008. People forget Obama inherited that program. He didn't create it.
Mark Zandi:
That's a great... Of course, it kind of evolved, right? I mean, early on, it was some kind of reverse auction kind of system, kind of thing?
Aaron Klein:
That evolution was all during the Bush administration and Secretary Paulson, who pitched a two-and-a-half page bill to Congress with almost no oversight or specificity and an idea of this reverse auction. In fact, the original proposal he put before Congress wouldn't have even allowed him to legally inject capital into banks. I was part of the team that rewrote that to make possible the exact course of action he pursued.
Mark Zandi:
Got it, and of all the myriad aspects of Dodd-Frank... That's the financial regulatory reform that was passed, I guess, in 2010. Wasn't it-
Aaron Klein:
Mm-hmm (affirmative).
Mark Zandi:
... in 2010 in the wake of the financial crisis? I've been dying to ask someone this question who worked on it. What would you put as the best, most effective provision in that legislation, now, looking back some 10 years later?
Aaron Klein:
The creation of the Consumer Financial Protection Bureau. We had a structural problem in financial regulation where you had a group of bank regulators that prioritized the bank's health above that of the customer, and we were never going to get out of that viewpoint without creating a separate entity who's sole purpose was protecting consumers, and I think that was the number one accomplishment of the legislation-
Mark Zandi:
Interesting.
Aaron Klein:
... and has lasted. People said... I think President Trump campaign, "I'm doing a big number on Dodd-Frank," and here we have the CFPB more than a decade old and with some strong, new, invigorated leadership.
Mark Zandi:
Yeah, exactly. They're doing a great job. They've been playing a big role in the eviction crisis and trying to help mitigate the fallout from that.
Mark Zandi:
Let me ask you this question. Of all the myriad provisions in Dodd-Frank, which did you like least... which has been least effective?
Aaron Klein:
That's a very good question. I like to put it to you the following way.
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
There's a core of Dodd-Frank that kind of works together, and then there are a series of things that were added to Dodd-Frank, usually named by an amendment for someone else.
Aaron Klein:
When you think about Dodd-Frank, it was passed with the bare minimum number of votes in the Senate. There wasn't a single vote to spare the 60 threshold point of order, and, so, that's unique.
Aaron Klein:
Every other major banking bill in the 20th century, whether regulatory or deregulatory, ultimately had a large bipartisan consensus. Sometimes it was geographic, the agriculture states against the banking states, the banking states against the very populous states, but they all had very large numbers. Even Gramm-Leach-Bliley, which deregulated the financial system, was passed finally at a 90 to 10 vote.
Aaron Klein:
When you have big bipartisan majorities are able to hold off kind of little external amendments, which may or may not make sense with that theory of your bill-
Mark Zandi:
Oh, I see.
Aaron Klein:
... and legislatively making Dodd-Frank happen, which was not a sure thing, a lot of compromises had to be made and amendments added onto it.
Aaron Klein:
Some of those amendments are good or bad. Mark, most of them aren't part of the core theory of Dodd-Frank, but all of them ended up bringing somebody onboard, and when you don't have a vote to spare, you have to make those types of sacrifices.
Aaron Klein:
So, I like to say most of the time when I'm dealing with Dodd-Frank critics, they're talking this amendment or that amendment as their big problem-
Mark Zandi:
Right.
Aaron Klein:
... I say, "Well, if you brought onto the core of the bill things like the Failure Resolution provision, which, when separately voted on, had over 90 votes in the U.S. Senate, maybe, with some broader legislative trade-offs, you could have held off some of those extraneous amendments, which, today, people are complaining about."
Mark Zandi:
Got it. So, you're telling me there're some things you don't like, but don't blame me for them. They're someone else's fault.
Aaron Klein:
That's it.
Mark Zandi:
Got it.
Aaron Klein:
Everything the Obama administration did in the first term that you like, I strongly supported.
Mark Zandi:
Yes, exactly.
Aaron Klein:
Everything you didn't like, I fought against internally, and everything you wish we'd done, I was all for, and I never went to a single meeting on Obamacare.
Mark Zandi:
I hear you, I hear you, I hear you, I hear you. Well, I got to have you back on just Dodd-Frank because there's so many elements of that. I don't want you to answer this, but I'm just really curious about what you think about risk retention because that's another aspect of Dodd-Frank I thought was something to talk about, but we'll get you back on if you're... We'll see how-
Aaron Klein:
I'd be happy to.
Mark Zandi:
... this one goes, and if you want to come back, given Cris really lays it on hard on our guests, so some of them don't want to come back, but, assuming you want to come back.
Aaron Klein:
Smart move walking back that invitation to have me back before you even see how I did.
Mark Zandi:
Yeah. I didn't want to be presumptuous. That was the reason for rolling it back. No, you're welcome anytime. You're welcome anytime, but we will come back to the topic du jour, and that is digital currency in just a few minutes.
Mark Zandi:
On the podcast, we begin with a bit of a game around the statistics, just to give people a sense of how things are going in the economy and how the recent statistics play into our thinking about the economy, and, Aaron, you're more than welcome to play that game.
Mark Zandi:
Just to give you a sense of it, maybe I'll start with... Cris, should I start with Ryan this week with the statistic of the week?
Cris deRitis:
Either way.
Mark Zandi:
All right. Well, let's go to Ryan first. By the way, I should say, Aaron, and I will stop saying this at some point, but Ryan is arguably the best forecaster of Real Time Economic data in the world. He's very, very good at this, and, usually, Cris and I can't keep up with him, but we'll give it a shot. So, fire away, Ryan.
Ryan Sweet:
All right. There wasn't a lot that came out this week. It was a very, very slow week-
Mark Zandi:
Yeah, it was quiet.
Ryan Sweet:
... but this number is a record low since the inception of the data in the early 2000s. It's a ratio, 0.8. Mark, you should know this one.
Mark Zandi:
Is this from the JOLTS report?
Ryan Sweet:
It is.
Mark Zandi:
JOLTS being Job Opening Labor Turnover Survey, which gives us a read on everything from open job positions to [inaudible 00:11:51]... That must be separations or layoffs, no? Layoff rate?
Ryan Sweet:
You're almost there.
Mark Zandi:
Layoff rate?
Ryan Sweet:
No, ratio. Ratio.
Mark Zandi:
Well, layoff rate is a ratio, right?
Ryan Sweet:
Right, [crosstalk 00:12:03] yeah.
Mark Zandi:
Oh, it's a ratio. Oh, I know what it is. It's the number of unemployed to open job positions.
Ryan Sweet:
Correct. Very good.
Mark Zandi:
Oh-
Ryan Sweet:
That's a record low.
Mark Zandi:
... ding, ding, ding, ding, ding, ding, ding, ding, ding. I got it. Well, it took me a minute.
Ryan Sweet:
So, Cris, just so you know, Mark was "O for" while you were gone.
Mark Zandi:
I was. To be fair, he's right.
Ryan Sweet:
Of course, that's a record low, and we have 10.9 open positions, so, it's, again, getting back to our discussion in the past, it's not a labor demand issue. It's a labor supply problem, and that's why the Delta variant is a little bit concerning, that that could delay when more people come back into the labor force, which we desperately need.
Mark Zandi:
So, did you say 10.9 million open job positions?
Ryan Sweet:
Correct.
Mark Zandi:
And that's a record number by, I think, orders of magnitude, right?
Ryan Sweet:
Oh, yes. Yep.
Mark Zandi:
Yeah, so, when I look at that, fundamentally, it just makes me optimistic about the economy's prospects, right? I mean, because you're right. The supply side of the labor market has all these impediments that we've talked about in previous podcasts, but those will get ironed out as the pandemic ultimately winds down and people figure things out.
Mark Zandi:
Well, towards the top of the list, I think, looking at the household pollster rate from census, the number one reason people give for not going back to work is they're parents, and they're taking care of kids, so, presumably, with schools now reopened for in-person learning, we should start to see that wind down.
Mark Zandi:
Then, after that, it's people who are sick or taking care of sick people or fearful of getting sick, and, presumably, that should wind down too with the pandemic. So, to me, that 10.9 million means, assuming the pandemic winds down here in a reasonably orderly way, we're going to get lots of jobs over the next year in a few months, right? Is that your interpretation?
Ryan Sweet:
Yeah, I agree.
Mark Zandi:
You agree, okay.
Ryan Sweet:
The next few months are going to be a little bit rocky. You've got the hurricane effects. We've been tracking the number of school closures or schools moving to virtual learning across states, and that's beginning to creep up, so September, October might be a little bit difficult for the job market, but I agree with you. Next year, we're going to see really strong job growth.
Mark Zandi:
Well, I've got a number for you, and I'm just going to say it because it comes out of JOLTS, but let me see how good you are... 4,000,000.
Ryan Sweet:
Is that quits?
Mark Zandi:
3,977,000, to be precise.
Ryan Sweet:
Is that quits?
Mark Zandi:
Oh, that's quits. That's right, yeah. That's the number of quits, which is also, by the way, record high.
Ryan Sweet:
Yep. So, if you've seen over the last few months, we've seen a lot of larger than usual upper revisions to job growth, and that's not unusual when you have growth in the number of people quitting their job running that we've seen recently. There's a lot of labor market churn, so your first estimate of employment's going to be a little bit difficult to pinpoint accurately.
Mark Zandi:
That's interesting. It makes sense because people are in transit, as you say-
Ryan Sweet:
Exactly.
Mark Zandi:
... in between jobs, right? I should point out, this JOLTS number that we're talking about is for the month of July, right, so it's a bit lagged. We did get August employment data, and that showed a pretty soft month. We talked about that last week, so I suspect the JOLTS report, this report we're talking about for the month of August, will show some weakening relative to what we saw in July. It'd be my guess I would think. Okay. Very good. So, an inherently optimistic report. That's a good one.
Mark Zandi:
Cris, you ready to play the game? I know you-
Cris deRitis:
Yeah, of course.
Mark Zandi:
... might be a little bit rusty, not playing this game for couple weeks.
Cris deRitis:
I think I've kept up.
Mark Zandi:
Oh, you have? Okay.
Cris deRitis:
It has been a slow week as well, though, so you're probably going to get this one pretty easily... 18%.
Mark Zandi:
It's got to be house prices. That's all they-
Cris deRitis:
It is.
Mark Zandi:
... talked about is house prices.
Cris deRitis:
Record high growth rate, right? How can I not cite that one? Don't even need the foreign press here, right?
Mark Zandi:
Another record high. That's a record high-
Cris deRitis:
The record high growth rate since the inception of the series back in 1976, so pretty incredible.
Mark Zandi:
... and, then, if you look at it by metro, right, or by state, it's even more impressive, right? Idaho's up 33.6% on a year-over-year basis, and Phoenix is up 30% on a year-over-year basis, so house prices are just rip-roaring, and I think it feeds in nicely to our crypto discussion.
Aaron Klein:
Yeah. [crosstalk 00:16:53]. The fed must buy mortgages to keep the economy going, and that has no [inaudible 00:17:00] effect on asset problems whatsoever. They are friends of [inaudible 00:17:05].
Mark Zandi:
Listener, listener, Aaron's being... That's sarcasm coming out of Brookings. That's how they sound sarcastic. Yeah, yeah, okay, but is that the CoreLogic Index-
Cris deRitis:
Yeah.
Mark Zandi:
... the CoreLogic HPI-
Cris deRitis:
That's right.
Mark Zandi:
... House Price Index? Okay, repeat sales.
Cris deRitis:
That comes out on Tuesday.
Mark Zandi:
Okay. All right. Which metro area is experiencing the strongest HPI growth, and this is year-over-year growth, I believe, through the month of... Is it August or July did you say? July?
Cris deRitis:
By July.
Mark Zandi:
July.
Cris deRitis:
Averages of July. It's Phoenix.
Mark Zandi:
Phoenix. Yep, Phoenix, okay.
Cris deRitis:
30%, right? Close to 30%.
Mark Zandi:
Yep, 30%.
Cris deRitis:
Can you imagine that your house just appreciated by almost a third in one year? Does that make any sense?
Mark Zandi:
Not really.
Cris deRitis:
Okay.
Mark Zandi:
The crypto is up 300% probably over the same period. I will come back to that, but-
Cris deRitis:
Yeah.
Mark Zandi:
... yeah, okay. Very good.
Cris deRitis:
Okay, so, Aaron, you got a gist of the game?
Aaron Klein:
Yeah, I got a number, and since I'm here from Washington, I thought I'd give you... and since I started my career in statistics and have since come to believe that the margin of error often swamps the certainty with which economists rely on data, I'm going to give you an actual factoid as opposed to a sample or statistic, and the number is 17,576.
Mark Zandi:
17,576. You got to give us some context. Is this in the financial system in some way? No?
Aaron Klein:
It is the answer to a question. The root cause is one of the problems as to how government officials and some people in the private sector speak.
Mark Zandi:
Wow. Do you guys have any sense on that one?
Cris deRitis:
No.
Mark Zandi:
Really? 17,576.
Aaron Klein:
17,576.
Mark Zandi:
Right.
Cris deRitis:
Are those dollars?
Aaron Klein:
No. [crosstalk 00:19:11]
Ryan Sweet:
Okay, words in a bill?
Mark Zandi:
Give us one more hint if you can do it without giving it away.
Aaron Klein:
So, a lot of people are talking about the square root, our recovery?
Mark Zandi:
Yeah, yeah.
Aaron Klein:
Right? This number has an integer cube root.
Mark Zandi:
Oh, my God! It sounds like it comes out of Washington.
Aaron Klein:
Am I being Brookings dorky enough for you guys?
Mark Zandi:
You are definitely. You can play this game anytime you want, Aaron. Yeah, this is good.
Aaron Klein:
So, I will give you the answer unless you guys have a question.
Mark Zandi:
I think so. Do you guys give?
Cris deRitis:
I give.
Ryan Sweet:
Yeah, I give up.
Aaron Klein:
17,576 is the answer to the question, "What is 26 cubed?" 26 cubed would be roughly the number of possible three-letter acronyms.
Mark Zandi:
Okay. Somewhere, I'm sure somebody would've gotten that.
Aaron Klein:
Some other person who does that, despite having 17,576 different options, in Washington, when people say, "CRA," I don't know if they're talking about Credit Rating Agencies, Community Reinvestment Act, or the Congressional Review Act-
Mark Zandi:
Yeah, all good acronyms.
Aaron Klein:
... or the Credit Reform Act, actually, all of which are CRAs that I deal with from time to time in work.
Mark Zandi:
Yeah, yeah, yeah, yeah. Actually, that would make a good paper. Just go through all the acronyms. Yeah, that's a really good one. That's [crosstalk 00:20:38]-
Aaron Klein:
I won't bore you with how many different ABAs there are in town, although I will tell you that one time I tried to invite the American Bankers Association, and my staffer invited the American Beverage Association-
Mark Zandi:
Close!
Aaron Klein:
... and so we got a bunch of beer instead of some bankers and neither any lawyers from the Bar Association or bus riders from the American Bus Association.
Mark Zandi:
You're making that up, Aaron. I can tell. You're making that up. Really?
Aaron Klein:
Hand on a stack of bibles.
Mark Zandi:
Oh, my gosh! That's a good one. That a really good one. Well, we've got our own set of acronyms as well, but we're careful on this podcast to define our acronyms, which is apropos for what we're going to do soon and talk about crypto.
Mark Zandi:
Should I give you one statistic? I mean, because it was a pretty thin week, but maybe just to temper kind of the optimism, the 18% House Price Index and the 10.9 million open job positions, and, Aaron, I don't think you'll get this one, but there's a pretty good shot Ryan will, but I'll preface it by reminding everyone of a statistic you talked about last week, Ryan, and that was our tracking estimate for GDP in Q3, the current quarter, and that's been coming down because of the effect of the Delta virus on the economy.
Mark Zandi:
It's definitely denting the strength of the economic recovery. It's now down to 3.9%, and it had been, back four or six weeks ago, closer to, I think, as high as 7%. Is that right, Ryan?
Ryan Sweet:
Yeah, we started off about seven.
Mark Zandi:
Yeah. So, we're now down to 3.9, which, in any other time, is pretty good, but that feels like a pretty big come down, and it's headed in the wrong direction, but here's the statistic, and, remember, the 3.9 is just to give you a bit of a clue, minus 0.4%.
Ryan Sweet:
And this came out this week?
Mark Zandi:
Mm-hmm (affirmative). Might have been the week before this week.
Ryan Sweet:
Okay.
Mark Zandi:
Yeah, but it is a statistic that we cover on Economic View, so you should know it. In fact, you may even cover it. You may even write about it. I'm not sure. You construct it for sure. It's one of your babies.
Ryan Sweet:
Oh, is it the monthly GDP?
Mark Zandi:
Got it! There you go-
Ryan Sweet:
Oh, yeah-
Mark Zandi:
... monthly GDP for the month of July.
Ryan Sweet:
... I love that thing.
Mark Zandi:
So, in the month of July, we created over a million jobs, but monthly GDP, that's just totaling up output in the economy, production in the economy, declined four-tenths of a percent, and if you look at the monthly data, real GDP, that's the value of all the things that we produce, really has not moved since April, so we got the American Rescue Plan in March.
Mark Zandi:
That really pumped things up in March going into April, and then May, June, and, now, July, basically, it was down in July, but if you look through the ups and downs, it's basically flat, which is clearly in part a reflection of the fading of the fiscal support from the American Rescue Plan, but also a big part of that is now I think Delta, and Delta's big impact probably will come in August, right, I would think-
Ryan Sweet:
Mm-hmm (affirmative), correct.
Mark Zandi:
... so a cautionary tale that this economy, this recovery, while prospects are really good here, is still tethered to the pandemic, and the ups and downs of the pandemic really matter to what's going on.
Mark Zandi:
So, with that, one more question before we move to crypto, and I know we're going to get there. I promise. What do you think of President Biden's executive order yesterday using OSHA, that's the folks that look over the safety of workers, to have businesses with over 100 employees require their employees to get vaccinations? What do folks think about that? Do you have a view? No? Okay. You don't even want to touch that. Aaron, do you have a view on that one?
Aaron Klein:
It's not my core area, but there was a secondary question. There's like a bit of kind of I would say it's not really a white collar or blue collar, but it's really the more modern version, which is can you do your job remotely?
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
So, if you can do your job remotely, and the employer essentially runs an organization that easily transfers to remote work, is a vaccination mandate among all of their employees enough to bring people back into the office, right, because you can require all your employees to be vaccinated and not return them back to work. There's kind of that hidden assumption.
Aaron Klein:
Now, if you require in-person work, right, you can see a very different argument in which the vaccination status of the person two feet to my right on the assembly line or the restaurant or whatever it is that you want to do, has a direct health impact to my consequence, and then you can ask the question again, what's going to be the verification of this process, right?
Aaron Klein:
I mean, we require all employees to present valid tax identification numbers. Is that followed for all employees and employers there, and how is that going to work, and what is that going to mean for people who are really choosing not to get vaccinated, and where are they going to fit into this differing labor force?
Mark Zandi:
Yeah. Lots of open questions. I mean, though I can see arguments on both sides of this one, but, fundamentally, if you buy into the view that the economy's performance is critically dependent on the pandemic, and it's obvious, if you have more people vaccinated, the pandemic is going to be less of an issue, then, it's very much an economic issue that should be, at least on the margins, supportive of economic growth, you would think.
Aaron Klein:
You're assuming that more people vaccinated changes the psychology and process of how people engage in the economy, and what, at least, I'm observing somewhat anecdotally and somewhat in the data is that vaccinated people for a variety of reasons are still perceiving the risk of COVID to be greater than what appears to be the scientific consensus as to that actual consequence, and/or the question about when are we going to vaccinate people under the age of 12, I think plays a very large role into that question because there's this...
Aaron Klein:
Parents are simultaneously judging what's the risk to me of infection, and, if infected, what risk do I pose to my children? One can understand people perhaps being overly cautious when it comes to the future health of their children vis-a-vis and taking a different risk premium perspective than, say, what the Center for Disease Control says are the actual health consequence risks for kids under the age of 12.
Mark Zandi:
Yeah, you're totally right. I mean, it really depends on the behavior of individuals and how they respond, and it's hard to-
Aaron Klein:
Right. This is one where our macro models really break down because there's such heterogeneity of responsive individuals. We can assign people different probabilities, but we have very limited data to kind of point to the question like what share of people will not go to a restaurant? What share will only do outdoor dining? What share would do indoor dining if there was a vaccination requirement, or if there wasn't a vaccination [inaudible 00:28:28] just anybody have a guest, and then how does that change geographically? Is Applebee's the same as Ruth's Chris, right? I mean, there's a whole different set of questions here.
Mark Zandi:
Yeah, all good points, and, actually, talking about human behavior, maybe it's a good segue into the topic, and that is digital currency.
Mark Zandi:
Let me just frame it a little bit by saying, when I talk about digital currency, I'm speaking more broadly than just crypto. Crypto everyone kind of associates with Bitcoin and maybe Ethereum, although there are thousands of cryptocurrencies out there now, but it also goes to new types of digital currency like stablecoins is a new one, utility coins, and something that's come to the fore even more recently that we think we need to talk about is central bank digital currency as well.
Mark Zandi:
There's lots of different digital currency, but before we kind of dive in, and, listener, we're going to try to do this in a way... because I know it's very confusing because we're mixing finance with technology, both pretty mind-numbing disciplines, and bringing them together makes it all the more mind numbing, and it's all changing very rapidly, so very difficult to keep track of, so we'll do our best to kind of define terms and make sure that we make clear our arguments and discussions, but let me ask Aaron, would you characterize yourself as a crypto proselytizer or a crypto critic or something in between?
Mark Zandi:
We know Cris is a proselytizer. I just hear it from him all day long about crypto, and Ryan is a crypto critic. He's just dead set against it, and you can see the differences in the way they're dressed. Look at the way... Cris looks prosperous and doing well. Ryan not so much. I'm not so sure.
Ryan Sweet:
I'm going for comfort.
Mark Zandi:
Going for comfort.
Ryan Sweet:
Yeah, but Cris, he-
Mark Zandi:
Definitely, [inaudible 00:30:38]-
Ryan Sweet:
... jet sets off to Italy.
Mark Zandi:
That's what I'm saying.
Ryan Sweet:
Yeah, I know.
Mark Zandi:
Yeah, [inaudible 00:30:43]. I'm surprised we don't see he's in his wine cellar there in Abruzzo.
Cris deRitis:
Uh-huh (affirmative), uh-huh (affirmative).
Mark Zandi:
Yeah, but, Aaron, are you a crypto proselytizer or critic or somewhere in between, just so we level set here?
Aaron Klein:
Look, I think I'm somewhere in between.
Mark Zandi:
Okay.
Aaron Klein:
I think that crypto has become shorthand for accumulation of very different set of concepts which need to be disentangled, right? One is the creation of this new thing, which is a cryptocurrency, which is either a medium of exchange or a store of value, and ever appreciating asset, a true bubble, right? Lots of people will wonder and debate this.
Aaron Klein:
The second kind of question is the underlying technology that enabled it, Blockchain, which may well be the single biggest advance in accounting since the advent of dual-entry bookkeeping, which helped spark the renaissance in not to far from Cris is right now over 500 years ago.
Mark Zandi:
Oh, yeah, right.
Aaron Klein:
If market finance and technology were too exciting for the audience, I'm happy to introduce accounting history. The Blockchain idea I think has a tremendous amount of application in the ability to handle and potentially move a wide variety of ledgers and recordkeeping, which are handled ridiculously inefficiently in our current system, witnessed land title and deed registration, which I know you'll appreciate take an inordinate amount of resources out of housing and the general economy in recording title, insuring title, checking title, all of which produce seemingly very little real world benefit.
Aaron Klein:
I think title insurance has the single lowest payout of any "insurance product," at single digits. Car insurances usually pay out about 100% of their premiums back to their customers. I think title insurance is somewhere around 7%, and all of this could be done a lot more efficiently or effectively in this new Blockchain technology. Whether that technology is ready to usher in an era of a new non-government-backed currency that simultaneously replaces state-backed fiat currency as the dominant form of money in society or also representing an ever appreciating new asset class for investors, I think there's a lot to unpack there.
Aaron Klein:
I doubt that the proselytizers will get every single thing right, but I was talking to my nephew about this, who kept saying, "This is like what the internet was when you were my age, Uncle Aaron, and I'm reminded of kind of two different things, right?
Aaron Klein:
One is Netscape was a darling until it was worth nothing, and Yahoo the same. I'm also reminded that Amazon crashed from being worth $100 a share at the top of the peak to under $10 a share, and if you bought at the top of the bubble in 2000 and held, you'd be mighty rich right now-
Mark Zandi:
Right.
Aaron Klein:
... and so there may be winners and losers, and some things may permanently shake out, but-
Mark Zandi:
There's a lot to unpack there, and I'm not sure I want to go down the Blockchain route, except to say, and the listener is going to get a sense of this pretty fast, I am a crypto... I wouldn't say critic, but skeptic. I'm a skeptic.
Mark Zandi:
Certainly, with the current state of technology, and even on Blockchain, I'm somewhat skeptical. You brought up title, and this is a bit of a side bar. We'll just explore it a little bit, and then we'll come back, but on title insurance, it seems like, slam dunk, this should be on Blockchain, right, because you're just following who owns this property over time, and you want it to be completely transparent, no questions asked, and you're right.
Mark Zandi:
I mean, it seems like a very expensive kind of insurance just to keep track of property rights, which, by the way, property rights are incredibly critical to a well-functioning economy, so we've got to get this right, but why isn't title insurance on Blockchain? Why isn't it already? Why hasn't someone disrupted that industry? I don't get it.
Aaron Klein:
I mean, look, it's giant rent-seeking that's already in, that is well embedded. I mean, if you go to close and settle on your house, the settlement attorney is probably making a majority of their profit on that transaction on what is optional owner's title insurance.
Aaron Klein:
Try declining it. I have on every one of my purchases. You'll watch the settlement person who one minute is plying you with free candy and beverages flip out at you. First, they'll offer you a deal where they cut the price significantly.
Aaron Klein:
I mean, people need to walk into some of these negotiations like you're buying a car and have the same skepticism on a HUD one or formula about these fees as you do when a dealer shows you an invoice, and you need to step back and ask the question, Mark, why was I even sold title insurance on the fourth floor condo of my unit that previously had been an abandoned bottling factory?
Mark Zandi:
I'll tell you, I was approached about... I don't know, two years ago, by a group of young guys who were starting a company. The idea was title insurance on Blockchain. I go, "This is a great idea." It went nowhere, and I don't get it. I mean, because, you're right, you've got these entrenched interests that are making it more difficult, but if someone came out with a better mouse trap that was much less expensive and worked better, why hasn't that happened? What's-
Aaron Klein:
How do you get it in the hands of borrowers and buyers?
Mark Zandi:
... I'd just put it on the internet, and I'd say, "Hey, use this. This is better." I would think that would be a win. No?
Aaron Klein:
Most people I don't think even are aware that they can decline owner's title insurance at settlement, right? You can decline the lender's title insurance, and it is not made transparent to you at all. I mean, who here read every form at their closing?
Mark Zandi:
Cris did.
Aaron Klein:
I mean, is it humanly possible? How much of your life did you spend doing that?
Mark Zandi:
I'll tell you that the other agents were not happy.
Aaron Klein:
I hope you brought a sleeping tent to that [crosstalk 00:37:23]-
Mark Zandi:
No, but you're right. Even then, I did read quite a bit, but it's impossible. One point I would make though, for the U.S., at least we do have some competition when it comes to title insurance. There's actually some efficiency there. I think it even makes more sense outside the U.S., right?
Aaron Klein:
... I take zero competition or efficiency. You can't walk into your settlement agent and bid off three different title insurers.
Mark Zandi:
Yeah. Well, okay, so-
Aaron Klein:
I think, digitally, though, it's really entrenched here. Making a transaction is in the hands of this cabal of nerds.
Mark Zandi:
Okay. We now has a second podcast we need Aaron to come back for... Only title insurance. We're going to focus actually on closing costs in general. We got to do that because that's a big deal. I agree with you, but there might be something else going on here that's limiting the ability of Blockchain to really take off, and that's just my broader point, that it's more than entrenched interests, but, anyway, let's come back to crypto, and the point you made early on, and that is that it's a cryptocurrency, and a currency works, people want to hold that currency and use that currency for two primary reasons.
Mark Zandi:
One is it's a medium of exchange. I can take that, whatever it is, and translate that... pay somebody with that currency and get something in return, so it's a medium of exchange, and it's also a store of value that, if I get that currency, I know what it's going to be worth, roughly speaking, a week from now, a month from now, a year from now.
Mark Zandi:
There's inflation and deflation, depending on where you are, so forth and so on, but, broadly speaking, you know what it's worth, and the so-called fiat currency... That's the dollar, the yen, the euro. That's fiat because it's the governments that are backing these currencies. People trust it, and the currencies are stable. They're a reasonably good store of value.
Mark Zandi:
Let me give you a statistic. To this point, on medium of exchange and store of value, if I look at the volatility of crypto prices... So, if I just look at the ups and downs and all arounds, I mean, the technical definition is the standard deviation of price changes over some period of time. Let's take it over a year. For Bitcoin, which is the predominant crypto out there still, although not the best one, but the predominant one, the volatility is 75%.
Mark Zandi:
We can discuss what that measurement is, but just for orders of magnitude, if I go look at the volatility of the value of the dollar on a broad trade-weighted basis, it's 5%. Equity prices, stock market, which everyone thinks about as a volatile market, there's lots of risk there, 17%. This is over the last year. It gives you context.
Mark Zandi:
So, given that volatility, how can crypto be a medium of exchange? How can it be a store of value? I don't get it. I mean, am I talking to the choir here? I mean, is that right, or what's the counter?
Aaron Klein:
Mark, let me try to offer one more concept that you kind of danced around in these different discussions, but didn't address, which is what is money, right? I think society has made a mistake in accepting a definition of money, which is a medium of exchange. That's kind of constantly what you referred to.
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
If you go back, that really comes from John Locke, who was a really smart guy about a lot of things, but about money he was not.
Aaron Klein:
I think a better smarter definition of money is money is a system of debits and credits in which you can have third-party exchange without prior party consent. Let me unpack that for a little bit, right? A system of debits and credits we get, right?
Mark Zandi:
Right.
Aaron Klein:
Everything you mentioned was a system of debits and credits, but what do I mean about without prior party consent, right? So, Mark, let's assume that you and I trade each other lunch. Our medium of exchange is lunches. You take me out to lunch. I take you out to lunch, right? That's a medium of exchange, paying or picking up the tab.
Mark Zandi:
I'm not saving my lunch, but, okay, we'll go with it. Go ahead.
Aaron Klein:
I decide that I owe a debt to Ryan because we also have this exchange. I cannot say, "Ryan, I'm going to square my debt to you by you taking Mark out to lunch," without your consent, right? Can I give Ryan a gold bar and gold shavings? Yes, right? Gold can function as money, and point of fact, for a long period of global history, it did because... right?
Aaron Klein:
In this way, crypto can function as money. It's a system of debits and credits that can be exchanged without prior party consent, but gold is an ineffective medium of exchange. If you've every held a gold bar, it's super heavy. It's value may move more or less than the dollar or stocks. It's not a question of its fluctuation. It's a question of how it physically transacts.
Aaron Klein:
In fact, one of the problems with Bitcoin as a medium of exchange is it's actually kind of a little bit slow in the current network and system, in point of fact, the technology that we have that processes medium of exchange right now, speed is one of its top priorities as well as ease of use and broad-based level of acceptance.
Aaron Klein:
Historically, governments issue money because only by support of the crown could you be positive of prior party agreement without past party consent, right? The government stands behind this. What crypto does is it offers the ability to have a ledger of debits and credits without government support and an ability to exchange that in prior situation, right?
Aaron Klein:
I can't offer you shares of my house because you're not positive that I own title to it, right?
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
If I try to give you shares of stock for something I was buying in the store, right, and you said, "Well, how do I know that's real stock?"
Mark Zandi:
Right.
Aaron Klein:
Crypto offers that potential ability, but it has real limitations as a medium of exchange based on the speed of its processing, and certain of those, the most common of which, I think, is Blockchain. As a store of value, sure, it could be valuable. I believe, over a long period of time, the fastest appreciating asset was Stradivarius violins.
Mark Zandi:
Oh, is that right?
Aaron Klein:
All sorts of things are given an assigned-by-society-
Mark Zandi:
Beanie Babies.
Aaron Klein:
... Yeah.
Mark Zandi:
Remember Beanie Babies?
Aaron Klein:
Yeah. My youngest daughter just found my old baseball cards when she went over to her grandmother's, right?
Mark Zandi:
There we go.
Aaron Klein:
Some of those things were going to be golden, right, where I was going to be living off my Ken Griffey Jr. Rookies.
Mark Zandi:
Right, exactly.
Aaron Klein:
So, different assets go up and down, and we've had appreciation of a wide variety of assets over time.
Mark Zandi:
Yeah. So, my interpretation of what you're saying is crypto can be money. It's just not very good money and certainly not relative to the fiat money that we think about here in the United States because we have the U.S. dollar, which is a very stable currency. We all trust it. It's been around a while. It's used in all kinds of transactions.
Mark Zandi:
We've got a Federal Reserve that's non politicized. They manage the value of the currency, at least indirectly, and so we're all good, but I guess that then begs a question. Under what conditions would crypto become better money, given the inherent volatility, given what you pointed out, the transaction cost, given the slow processing? Why would I go to Bitcoin versus dollar? Why would I do that?
Aaron Klein:
Let me also offer one more wrinkle in how the government tilts the scale in favor of the U.S. dollar, which is tax treatment. When your dollar goes up in value, which, as you said, Mark, it may only have that 5% volatility, but that means it can go up in value-
Mark Zandi:
Yeah.
Aaron Klein:
... we don't pay any capital gains tax on that.
Mark Zandi:
Yeah, good point.
Aaron Klein:
The government decided back when I was in the Obama administration that crypto was an asset like all other assets, and you pay capital gains tax. So, even if you wanted to transact, and you're a business and you want to accept crypto, buy and sell and buy your goods in crypto, take crypto from customers, you have to account for its change in value.
Aaron Klein:
If it does appreciate, then you have to pay a tax on that, which imposes large recordkeeping costs, right? What was your basis at receipt? What was your basis at expenditure, right, and also the question of which Bitcoin were you buying and selling when, right? We don't keep track of the serial numbers on our dollars for when they enter our account and depart on our account, but how would you account for what your Bitcoin was when you took it as a store and a customer and went out?
Aaron Klein:
Now, you asked a different question. Why could it be [inaudible 00:47:20]? Well, international remittances are one good example, right? They're very, very... The fee, and that was a part of Dodd-Frank I'm very proud of, Section 1073, which required disclosure of the cost of an international wire transfer, but, often, companies like Western Union were giving customers some not so great exchange rates, and the total cost of sending money abroad, which is a multi-billion dollar a year industry... I believe it's more than 10% of the GDP of a country like El Salvador comes in the form of remittances of its foreign workers. I think the Philippines [crosstalk 00:48:00]-
Mark Zandi:
I think it was 25%, yeah.
Aaron Klein:
It's a big deal in a lot of countries, international flows of funds, and it's very expensive.
Mark Zandi:
Yeah.
Aaron Klein:
The current system is set up on the idea that very wealthy people are going to wire large sums of money between their simple accounts in the U.S. and Europe and Japan, but if you want to send 300 bucks to your mom in the Philippines or El Salvador, you're going to pay a lot, and that's why some companies... I think that was one of the big cases for Facebook when they talked about their original proposal, Libra, which I believe is now Diem. It's one of the big cases for ideas for a company known as Ripple, creating a different crypto called XRP to help banks facilitate this chain.
Aaron Klein:
One of the issues that it becomes is there is no global currency, and if you're going to exchange between countries, then the current system is ill suited and expensive for lower dollar denominations, which, in the aggregate, are a lot of money, and there'd be reasons to think that you could go in and out of a third-party crypto in a better, cheaper way, and, as El Salvador pointed out, while people are starting to transmit in this thing, why don't we just start accepting it?
Aaron Klein:
El Salvador did that, not in Bitcoin, but in dollarizing their economy. El Salvador doesn't have its own currency to actually use as U.S. dollars. Several other countries do that around the world.
Mark Zandi:
You're making a good point. You're saying, okay, I can't see it really, given currency of technology, working in the developed world, but in economies like El Salvador, and we keep going back to El Salvador because this week the government of El Salvador announced that Bitcoin was legal tender, and they even installed some ATMs I think you can use for getting Bitcoin, I guess.
Mark Zandi:
So, in those circumstances where you have economies where people don't trust the currency, or in the case of El Salvador, I think you mentioned this to me earlier, they're dollarized, so they don't even have their own currency. They used the dollar as their form of currency up until this week when they allowed for Bitcoin, so in those cases, and then, of course, when you have an economy like that that relies very heavily on people remitting what they earn from oversees back to their family and friends in the home country, you've got these cross-border transactions where fiat money doesn't work all that well. It's very expensive. You have to use... What's that firm?
Aaron Klein:
Western Union?
Mark Zandi:
Yeah, Western Union. It takes a pretty big vig off the top for that. Then, in those circumstances, okay, that works, and also I suppose in kind of nefarious transactions where you want anonymity and in ransomware, drug dealing, that kind of thing, it makes a lot of sense. So, there are use cases for it. It's just hard to see the use case where it would displace the dollar or the yen or the euro or the won or whatever. Okay. Very good.
Mark Zandi:
Here's the other thing I wanted to just test out on you guys. This goes to the volatility, and, again, that is kind of fundamentally why it's not good money. It's not going to displace dollar. It's that it's inherently volatile because the supply of the crypto, let's take Bitcoin, is determined by an algorithm, determined by a formula, by a computer program. Whereas, the demand for that crypto, like any other source or type of money, goes up and down and all around, right, given circumstances.
Mark Zandi:
So, if that's the case, you have this inherent disconnect between the supply of the crypto and the demand for the crypto, and, thus, the volatility, even abstracting from the investment demand for it, the speculative demand for it. Does that resonate with you, Aaron, that argument?
Aaron Klein:
Well, I don't know if that's an... I mean, it's inherently deflationary in the sense of a finite amount. I'm not sure that makes it inherently volatile. I think one of the thoughts I've had, and I'd be interested in others on this, but from my experience in financial crises, a financial crisis only occurs if there are two simultaneous issues.
Aaron Klein:
One is the fundamental mispricing of an asset, and that asset can be anything. It can be the value of a sub prime mortgage in the United States or a derivative of that. It can be the value of a tulip bulb in Holland. It can be the value of a click online, right? Remember when we were underwriting astronomical values on the basis of number of clicks because we didn't know how to measure this new technology, right?
Aaron Klein:
What is the value of web traffic? We couldn't quantify it. Those create asset bubbles. Asset bubbles can be created by anything, often new technology that is difficult to figure out. Bubbles involve some level of volatility on both the way up and down. That doesn't necessarily mean that you're going to have a financial crisis, so I wonder how much of the volatility here has to do with the kind of fundamental questioning of the value of the asset as much as it does the nature of the asset being finite in amount.
Aaron Klein:
You don't need to have a finite amount, right? The reason there was a finite amount of Bitcoin at some level was as proof of concept, as well as making sure... The first concern about this was, well, what's to stop more of this from being released, right? There are other protocols that you could make that would guarantee 2%, 3%, a certain amount of additional release over time. There's a lot of flexibility with how you design this thing.
Aaron Klein:
The second issue was leverage, right? We didn't have a financial crisis with a dot com bubble, which we lived through in our lifetime, because people weren't really levered on stocks.
Mark Zandi:
Right.
Aaron Klein:
I'm frequently asked, "Could there be a financial crisis due to crypto," and I was always saying, "No, no, no" because I didn't see leverage. Then, I saw, and this was a while ago, some of the big U.S. banks stopping and allowing customers to buy crypto on credit cards.
Aaron Klein:
So, what people were doing when they were creating new credit cards, getting a $10,000 limit in the mail, buying $10,000 worth of crypto.
Mark Zandi:
I had never heard that.
Aaron Klein:
If it went up, they made profits. If it went down, they defaulted, right? In credit card lending, your loss given to default can be very, very high, unlike, say, mortgage lending where even with the actual experience in the subprime crisis was not nearly the scale of loss given default as some had predicted. What was it, Phoenix is up 30% right now, right?
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
If I'd gotten Phoenix real estate at the peak of the bubble in '08 and held it, I'd be up right now.
Mark Zandi:
Yeah.
Aaron Klein:
Is that right, or [crosstalk 00:55:15]-
Mark Zandi:
Yeah, for sure. Yeah. Oh, by the way, as a quick caveat, that's 30% unlevered, if you only had 10% down, think about the return you just got. Anyway-
Aaron Klein:
This is why I think home ownership is the number one source of retirement wealth for people because of leverage. You have huge leverage. Why do we frequently have financial crises derived from real estate? It's not the difficulty in measuring the value of the asset. It's the inherent leverage in real estate, and this is where some of the concern gets into crypto, particularly as it relates to the so-called stablecoins, coins that promise a one-to-one return to a fiat, and as Coinbase, which created a lot of news this week, have said, "We're going to offer a yield."
Mark Zandi:
Can I stop you for one second? Just one second just to level set for the listener that, okay, you have these cryptocurrencies, Bitcoin, Ethereum. They're highly volatile. It doesn't work very well as a medium of exchange because of the volatility, and, therefore, the solution that has come to the fore is this thing called stablecoin, and a good example of that would be... You might have heard of it, Tether.
Mark Zandi:
Tether is, I think, the largest stablecoin, and, essentially, what that does is it fixed the value of the stablecoin Tether to a fiat currency, say, the dollar. So, in the case of tether, it's one for one, so I'll give you one Tether coin for $1, and it's fixed. Okay, go ahead. I just wanted to make that clear to everybody.
Aaron Klein:
So, now, there's a digital wallet, right? This is the other layer, right? How do you hold crypto, right? You have to hold it somewhere, right? You hold money in a wallet, so this is your digital wallet. Where do you hold your stocks and bonds? In a brokerage account, right?
Aaron Klein:
So, there are these digital wallets, the largest of which is Coinbase. So, you're, "I'm going to put my Bitcoin in Coinbase. I'm going to put my Ethereum in mostly digital wallets, then use a token or some other thing to guarantee that." They said, "Well, now, we're going to give you a return. Keep your money with us, and we're going to promise you that yours is stable. We'll give you a one-to-one return, but will offer you a low yield." This is not a new financial innovation. It's called a money market mutual fund.
Mark Zandi:
Exactly, exactly.
Aaron Klein:
Right?
Mark Zandi:
Yeah.
Aaron Klein:
What does money market mutual fund do with your money? It invests. What did they do in 2008? They invested in wonderful things like Lehman Brothers, short-term commercial paper, and other debts. Money market mutual funds were not guaranteed by the government explicitly, but when the financial crisis hit in 2008, the Treasury and the Federal Reserve bailed them out. When COVID hit in 2020, they got bailed out again, so raise your hand if you believe they're not backed by the federal government.
Aaron Klein:
Then the question is, well, what are they investing your money in, and what transparency is required, and this is where you start to get into the opaqueness of the asset class, right? Money market mutual funds register with the Securities and Exchange Commission. They have disclosures and prospectuses that are supposed to tell investors what they invested. I have my own criticisms of this whole nature and structure, but you're seeing this occur in the crypto space generally offering much greater yields than what you'd find today in money market mutual funds, and you wonder where's that yield coming from?
Mark Zandi:
Yeah. So, what you're saying is that stablecoin, this one-for-one translation of a dollar fiat currency into a crypto is no different than money market mutual funds where I take a dollar, put it into the fund, and they go out and invest it, and they guarantee, and these are air quotes that no one can see, that I'm going to get my money back, that I'm not going to lose my money, which we know.
Mark Zandi:
In fact, some folks would say, going back to the financial crisis, that the thing that really set the world on fire was when that Franklin Money Market Mutual Fund, so-called broke the buck. They said, "No, I'm not going to give you a dollar back," when everyone thought, "Oh, this was money good. I'm going to get my dollar back." That same kind of dynamic is now starting to develop in the crypto market with these stablecoins.
Aaron Klein:
We've not seen a run of a major stablecoin yet-
Mark Zandi:
Yeah, well-
Aaron Klein:
... I can't tell you what they're invested in because it's not disclosed, and one doesn't know, right? One can be highly critical of the fact that the Franklin Fund, as you described, broke the buck and gave investors back 98 cents and somehow the Treasury Department and the U.S. government said, "Well, those investors in mutual funds can't lose money." Last I saw, the nature of investing is you can gain money or lose money. If you want to have stable money, you put it in the bank account up to $250,000 or buy U.S. Treasuries, right?
Aaron Klein:
I mean, part of the problem, I think, here is to some degree the government expectations, bailing out one asset class. I mean, Mark, Ryan, Cris, let me ask you. If Tether or somebody else broke the buck... hypothetically, one of these stablecoins broke the buck, and then there was a run, right, because the first person to pull their money out gets it, right, up until then there's either a pause in redemption, in which case there's going to be a time delay because there are two elements.
Aaron Klein:
One is you can get the dollar back. The other is whenever you want.
Mark Zandi:
Yeah, right.
Aaron Klein:
I can violate the contract to you in one of two ways, right? I can say, "Oh, I'm not going to give you the full dollar," or I can say, "Oh, you'll get the dollar, but it's three weeks from Wednesday because I got some issues here," right? Is the government going to bail out the crypto investors?
Ryan Sweet:
No. The Fed will let it die.
Aaron Klein:
Oh, really? I'm not so sure.
Ryan Sweet:
Oh, the Fed would not bail out a crypto, no.
Aaron Klein:
So, why not, Ryan? I mean, what makes a money market mutual fund... Why, if I have an ETF, an electronic traded fund in iShares, a bond fund, right? What moral imperative did those guys get bailed out, but the crypto investor didn't?
Mark Zandi:
Well, I think the answer is maybe not now because it's not big enough.
Cris deRitis:
The size, yeah.
Ryan Sweet:
Correct. It's the size.
Mark Zandi:
What about a year from now or two years from now when it's 300 X what it is today?
Aaron Klein:
But I object to size being the criteria here. In other words, what you're saying is the system's inherently rigged. If enough really, really rich people are in an asset because that's where you get size, right? The only size of an asset class can come from a lot of money being in it. Then, the really, really rich people will get bailed out by the government because if we let them suffer losses in their investments, it's bad-
Mark Zandi:
Well, I beg to differ.
Aaron Klein:
... but if a lot of little guys lose money, well-
Mark Zandi:
They're not little guys anymore. They're crypto kings. What are you talking about "little guys"? Look at Cris over here. I'm [inaudible 01:02:30]. There's zero probability I'm going to do that. Well, all right. I'll object-
Cris deRitis:
Thank goodness I don't have any crypto.
Mark Zandi:
... vociferously to that. Okay, but that's an excellent point. You make a great point. I know we're running out of time, and I do want to move on to spend a few minutes before we end the conversation on Central Bank Digital Currency, which is a cousin to all this other stuff we've been talking about.
Mark Zandi:
The idea there is that central banks, the Federal Reserve Board or the European Central Bank or the Bank of China would directly engage with consumers and businesses and not go through the banking system.
Mark Zandi:
Right now, we have digital payments, and it's all mostly digital now. I can't remember the last time I actually used a dollar bill with private financial institutions, JPMorgan Chase, Wells Fargo, those institutions, but this would upend all that, and the relationship would be between you and the central bank. Did I roughly explain that right, and, Aaron, what do you think about that?
Aaron Klein:
As if 17,576 possible three-letter acronyms wasn't enough, we have to move to four letters, central bank digital currency-
Mark Zandi:
That's exactly right.
Aaron Klein:
... CBDC, right? Now, I love using this acronym, CBDC, because we all use CBDC. It's our number one form of money in society. It's called commercial bank digital currency-
Mark Zandi:
Currency, oh, good point.
Aaron Klein:
... and those are all the plastic cards we transact with, and this is something that I hope listeners spend a moment thinking about. When you hand down your credit or debit card, what you're handing is a piece of plastic linked to a bank account, either a debit card of a bank or a credit card, which is really a loan from a bank. That's what a credit card is, right?
Aaron Klein:
It's not a Marriott or a Southwest card. It's from Chase, from Citibank, from Bank of America. It's actually a bank. That is commercial bank digital currency. It's what we use as money. There's a system of debits and credits. We all accept it, right? There's a terminal that says that you're an authorized user, and we believe the money's in your account, and at a level a couple steps behind the curtain, the government does guarantee the functioning of the system and does guarantee the money in your bank account so that you can leave it there.
Aaron Klein:
The question here is is there a need or role for the central banks to offer its own digital currency that we can transact in instead of the commercial bank's digital currency? China is doing this. Now, China is doing this for a variety of reasons, one of which is it stopped using commercial bank digital currency.
Aaron Klein:
People don't realize, but Chinese payments have been dominated by Alipay and WeChat Pay for quite a while. That's essentially Chinese Facebook and Chinese Amazon, who set up their own digital wallet linked to a bank account, possibly, probably on the backend, but then linked to a whole suite of other services, and everybody in China was using that ledger and that system of debits and credits, which had a very easy digital interface, and China didn't like that for whatever reasons and started cracking down on it. I'd point out they introduced the first rollout of Central Bank Digital Currency, the digital yuan in Shenzhen, which is the home of WeChat Pay.
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
So, imagine if the U.S. government wanted to compete with Amazon and rolled out a product and picked Seattle, right?
Mark Zandi:
Mm-hmm (affirmative), right.
Aaron Klein:
I mean, we'll just try this city perchance, right?
Mark Zandi:
Right, right.
Aaron Klein:
As we all know, Jack Ma and the fate of [inaudible 01:06:27] CEO, which is the home of Alipay, subject of great intervention by the Chinese government. So, there's a global race and question about all these government central banks. Do they want to issue their own digital currency? In the U.S., do we want to rely on commercial bank or central bank, and if we move to central bank digital currency, what is the role of commercial bank digital currency-
Mark Zandi:
Exactly.
Aaron Klein:
... in that world, and we have not really begun to address that. Instead, what we've done is say, "Oh, well, China's doing this, so we've got to do it, and Facebook's doing this, so the government needs to do something."
Aaron Klein:
By the way, I'm open-minded on it because, as I've pointed out, commercial bank digital currency is really good for the rich. What do you get? Cash back or points every time you use your card, but you only get that because you qualify. If you're low income, it costs you money to make your money digital. Try and buy a $100 prepaid card, right?
Mark Zandi:
Western Union, yeah.
Aaron Klein:
Right, at Western Union, exactly. So, our payment system is a giant reverse Robin Hood, and it showers benefits on the wealthy. Do you want to see the magnitude of your benefits go the points guy dot com, and that all comes out of somewhere, and it comes out of people with less money paying cash and prepaid cards.
Aaron Klein:
One out of every 10 swipes at the register, Mark, is a prepaid card. How many prepaid cards do we use on this podcast?
Mark Zandi:
Yeah, good point. Well, I think the solution is not central bank digital currency. You make a great point about the reverse Robin Hood. The solution is to make the current payment system work better.
Mark Zandi:
There's no reason why it can't be made to work better, but the thing that really worries me about central bank digital currency, and it's very ironic that we're having this conversation in the same conversation with crypto because crypto is fundamentally about decentralizing, right, taking the power away from government, but out there to the gazillions of people who are managing their own affairs, peer-to-peer kind of transactions, not anyone controlling it.
Mark Zandi:
Here we are talking about central bank digital currency, which is the exact opposite, and this is why China's all over it, right, because they want complete control, and they're going to see every single transaction, be part of every single transaction, and that makes me a little nervous to go down that path.
Aaron Klein:
Well, there's a real tension, right, between anonymity in payments and information in payments. The information stream of your payments is worth a lot of money, right? There's a reason why you put in your loyalty number at the supermarket, right, to get all those little discounts. It's so they can track what you buy in the supermarket, right? Whatever chain of grocery, whatever Safeway equivalent you have, and you put in your little rewards number, now, they can track so they can print in your receipt targeted advertisements, right?
Aaron Klein:
I mean, CVS kills thousands of forests to provide worthless paper to everyone, right, and we give up that information pretty willingly for... I don't know what levels of discounts we get, and then people get very squeamish about the government having this information, and there's a real push-pull tension in terms of how people say they value their privacy, how they act on it. Cash is an anonymous medium of exchange that's backed by the government. In today's society with concerns about money laundering, if we hadn't invented cash, would people allow it? It's great for ransom.
Mark Zandi:
Hey, excuse my dog in the background. The listeners of this podcast knows my dog quite well. He's increasingly senile. I love him to death, but he's on his own dynamic.
Mark Zandi:
Okay, we're running out of time, and I want to end it this way. It's now... What is today, September 10, 2021. We are now September 10, 2031, 10 years from now. What does the world look like in terms of digital currency? Aaron, I'm going with you last. I'm going to go with Cris first because he's the crypto king, so what do you think the world looks like in terms of crypto, in terms of stablecoin, in terms of central bank digital currency?
Mark Zandi:
Obviously, by then, we're going to have a whole new raft of three-letter acronyms and four-letter acronyms and all kinds of other stuff, but what do you think the world looks like? Is crypto a winning currency? Is it winning investment? Would you be investing in it now, thinking that that's going to be the future? That's kind of the frame. Is that reasonable? What do you think, Cris?
Cris deRitis:
Sure. I think the world doesn't look all that different from today. So, crypto still has a place, but it's still a relatively small share of hobbyists and speculators. I don't see it catching on in a major way.
Cris deRitis:
I also don't think that the central bank digital currency, for the reasons that we went into, catches on, certainly, in the U.S. I think things are different across different parts of the world, but if we're focused on the U.S., I don't think by 2031 we're going down that path yet.
Cris deRitis:
I think there's more research and there's certainly no [inaudible 01:12:12] advantage to the Fed, so I don't see any movement in that direction, and stablecoin is kind of the same. I don't see a real movement in that direction either. I think it's, again, a still relatively small component of the system.
Mark Zandi:
Okay. Just for context to the listener, the market value of crypto today... Anyone want to guess what that is, all in, roughly?
Cris deRitis:
Is it two trillion?
Mark Zandi:
Two trillion. Oh, damn it! I can't pull anything over these guys. Two trillion dollars.
Mark Zandi:
Okay, now, I'm going to really test you. What is the value of the single family housing stock? This is all you, Cris.
Cris deRitis:
I should know this. I want to say... I might be dated. I can't keep up with the 30% increases. Is it around, what, 20-22?
Mark Zandi:
No, no. No, it's close to 35-40 trillion.
Cris deRitis:
Oh, wow. Okay. I'm really behind.
Mark Zandi:
And guess what is the value of all public traded equity in the United States. Close to $50 trillion, yeah. By the way, all the Treasury debt outstanding, $22 trillion, just to give you context, so two trillion is a lot.
Mark Zandi:
Ryan, you're next, but, yeah, there you go. Sorry to the listener. He creates all these echos, so we've got to mute him when he's not talking. Anyway, that's very interesting. Okay, Ryan, you're up. What's the world look like in the world of digital currency 10 years from now?
Ryan Sweet:
I think it's going to go the way of Aaron and I's baseball cards.
Mark Zandi:
Really? Cool.
Ryan Sweet:
Yeah, I'm very skeptical [inaudible 01:13:57]. I think the people will figure out new technology to mine these things more efficiently. Also, I'm a little concerned that you get whales in the crypto industry where it's just like the market share is just like concentrated in a lot of people, then I don't know... I am just really skeptical of this. When my students are trading or trying to mine Bitcoin during class, that raises a red flag to me, so I think it's going to be like my Bo Jackson rookie card. It's not going to be worth much in 10 years.
Mark Zandi:
Okay. Hey, Aaron. Do you care what I think about this, or should... No, you don't really care?
Aaron Klein:
Definitely.
Mark Zandi:
Okay. Let me tell you what I think, and then we're going to end with Aaron because he's the guy who really counts here. I think it's going to be a bigger deal than we think it's going to be, and the reason is it's going to look very, very different 10 years from now than it is today, but it's going to be a much bigger deal, and the reason is it's almost self-fulfilling.
Mark Zandi:
So much money is going into it, and you can make a lot of money, that the best and brightest all over the planet are focused on how to make it work better, like, my nephew. I've got a nephew... I may have talked about him before in another podcast. University Penn, got, at the same time, a computer science degree with a degree from Wharton, at the same exact time while he's working on a startup company that he got Y Combinator money for. That's the kind of guy this guy is. A brilliant kid.
Mark Zandi:
He was traveling around the world not too long ago with this guy, Vitalik Buterin, who is sort of the quasi-founder of Ethereum, and they say, "Okay, we're going to meet up in Puerto Rico," and they all go to Puerto Rico, and they hang out in Puerto Rico, and instead of going to the beach, they stay in some dark hotel room and code all day long.
Mark Zandi:
Then, they head off to the south of France, and they head off to Manila, and this is the life they have. This is the beauty of the capitalist system, if you can make money, we solve problems. So, there are lots of technological problems with Bitcoin and Ethereum and stablecoin and central bank digital currency that we have today, but my guess is, unless this thing craters soon, it's going to take on a life of its own, and these problems are going to be solved, and it's going to be a bigger deal than we think. So, maybe I'm not as crypto skeptic as I thought I was.
Ryan Sweet:
Are you invested in crypto? Do you own any?
Mark Zandi:
No, and I am very close because the way I would view it is it's a lottery ticket. I mean, put something in there, you lose the money. Put something in there, some small probability or some probability or some meaningful probability that its worth a lot more down the road, so it's a kind of lottery ticket. So, Aaron, what do you think?
Aaron Klein:
Mark, I was in a conference this summer and bemoaning... I started doing Bitcoin stuff seven or eight years ago, and I didn't put any money in. I was talking to one guy, and he says, "You know, Aaron, I put 1% of my assets in crypto when I first learned about all this as schmuck insurance, and today it's 10% of my net worth," and I said, "Yes, and you're not a schmuck, and I am," right?
Aaron Klein:
So, the inherent wisdom of small amounts of diversification leading to things that may or may not have true home run potential, this is a good reminder. Look, in the next 10 years, I think there's going to be some sort of problem with some stablecoin somewhere. There's going to be a run on the system.
Aaron Klein:
We've seen systems structured like this before. I can't tell you when. I was involved in Congress when we held hearings on predatory lending in 2001 and 2002, and the Democrats controlled the Senate briefly, and my boss was very concerned about predatory lending, and we were laughed out of the room. "There are never going to be any problems with these types of small mortgages to low-income customers. How could that possibly create a problem?" \
Aaron Klein:
That was 2002, and it had a lot of room to run, and this is a global asset. One thing that I don't think we fully talked about is, like other assets, right, there's global demand for this.
Mark Zandi:
Good point, good point.
Aaron Klein:
Right? I mean, if you want to... We were talking about use cases. Suppose you want to move money out of a capital controlled country, Russia, China, right?
Mark Zandi:
Mm-hmm (affirmative).
Aaron Klein:
Suppose you want to move money out of a country to somewhere else. This is one way to do it. That is a very large demand among many countries around the world, so because this is a global asset, I think there's a lot more possible stake because everything else... It's hard to find true global assets outside of commodities, and we don't invent new commodities very often.
Aaron Klein:
I do think at some point there'll be a legislative crackdown. I think that will come after whatever scandal implosion, failure of something occurs where a little person is hurt. I agree with Ryan that the government will not bail that little person out when they invested in crypto.
Aaron Klein:
I would point out that investors in crypto are much younger than investors in money market mutual funds, bond index funds, or any of the other supposedly non-guaranteed assets that have been bailed out repeatedly by the central bank, and there's one other correlation I put on with age, which is race.
Aaron Klein:
Younger people are, by their nature, a lot more diverse and have a much higher probability of being a minority. One stat maybe... I'm giving up my stat for the next time, but the median age... I'm sorry, the modal age. Go back to statistics, mode being most common, the modal age for white Americans, 57. You know the modal age for African Americans in the U.S.?
Mark Zandi:
37?
Aaron Klein:
27.
Mark Zandi:
Is it really? 27, okay.
Aaron Klein:
Do you know the modal age for Latinos in the U.S.?
Mark Zandi:
22.
Aaron Klein:
11.
Mark Zandi:
Oh, wow. That is really interesting, yeah.
Aaron Klein:
Correlation of age and race is significant in society, and the correlation, I believe, of the probability of being invested in crypto as a little person is much higher the younger you are, right? I think we've all interacted with 25-year-olds who are in crypto far more frequently than we interact with 75-year-olds in crypto.
Mark Zandi:
So, what are you saying, Aaron? I mean, 10 years from now, it's a bigger deal than today?
Aaron Klein:
It's an interesting question. I mean, is it a bigger deal or not? I think, between now and 10 years from now, it will-
Mark Zandi:
Become a part of the global payment system-
Aaron Klein:
... have become a bigger deal.
Mark Zandi:
... a bigger part of the global payment systems.
Aaron Klein:
Yes. The global payment system doesn't work well, and there's a real value for a different type of global payment system unless you kind of see a Star Trek future where we have one united Earth, one united currency, and one united central bank, and maybe in the future, a United Federation of Planets.
Mark Zandi:
That's a great way to end.
Aaron Klein:
They have replicators. You don't need currency, right?
Mark Zandi:
Oh, there you go. There you go. Hey, Aaron, this was fantastic. I think you took a very difficult topic and made it very understandable and approachable, and I think you're going to be at least 51% right, so that's good too. No, only kidding. You were fantastic, and you're definitely on the hook. We're getting you back on the Dodd-Frank regulation and title insurance and everything housing related, so, please, if you're up for it, we'd love to have you back.
Mark Zandi:
Hey, guys, anything else before we call it a podcast. It's been a pretty action-packed one. Anything else? Thanks, Cris, for joining from Abruzzo. I know that was a bit difficult. It's a little late there in the evening, but thank you so much for doing that.
Mark Zandi:
Fair listener, we want those ratings, so please give us a rating and go to economy.com, Inside Economics, and tell us what you want us to talk about. I've been getting a lot of good emails around that as well, so feel free to fire away. So, with that, I will call it a podcast till next time. Thank you very much.
